CME confirms it will launch steel scrap contract

June 20, 2012|Reuters

The CME is looking to start trading of a new steel scrap contract in fall. (AP file)

The CME Group said it plans to launch a U.S. steel scrap contract to expand its offering of ferrous derivatives contracts, as the Chicago exchange aims to cash in on growing interest in price risk management in the sector.

The new contract, the exchange's 13th steel and steel raw materials contract and its second scrap contract, will be launched in the fall, a spokesman for the exchange said Wednesday confirming an announcement by Harriet Hunnable, managing director for metals, at the AMM Steel Success Strategies conference in New York.

The new contract could provide hedging opportunities to scrap recyclers, mini mills and construction companies, who buy long steel products produced from steel scrap.

Financial players, including U.S. bank JP Morgan, have also shown interest in the contract.

The CME contract could benefit from a recent decline in interest in the 4-year old steel physically backed billet futures offered by the London Metal Exchange. The contracts will be settled against an AMM index.

No other details were available, though it is likely to be cash settled as the Chicago exchange has had success with contracts settled against cash rather than physical delivery with its other steel products.

The news comes as the exchange continues to work on launching ferrous contracts in China, the world's largest steel producer and consumer and has a growing investor base, and as liquidity in its U.S. hot-rolled-coil (HRC) contract increases.

"Asia is the most actively traded market. We're putting a lot of resources into it," Hunnable told Reuters in an interview on Tuesday before the announcement. The exchange is working with its Chinese partner MySteel who is collecting pricing data to be used for a possible contract.

The exchange's HRC contract has attracted increasing liquidity, represented by open interest which has hit record highs above 14,000 lots in February, Hunnable said.

It has since fallen below that level, but remains just under 14,000 lots. Trading volumes are more volatile though, totaling around 6,000 lots in January and February, but plunging to less than 2,000 lots in the following two months.

U.S. service centers, appliance manufacturers and steel mills are using the contract, she said.

Steelmakers, including ArcelorMittal and Nucor Corp, have been vocal in their opposition to futures contracts, but Hunnable said mills are started to invest in educating their staff on hedging. She declined to name mills that have been using the hedging tool, but said growing liquidity have helped to build confidence among users. "They're very engaged. They are very alive to price volatility and the fact that the futures contract is working," she said.